The document provides an overview of U.S. state and local indirect tax. It discusses key concepts such as nexus, taxability, exemptions, and tax rates. It also examines the complexity of sales tax laws and how they can vary between states and local jurisdictions.

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U.S. State and
Local Indirect Tax Overview
12 July 2016

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Agenda
• Key Concepts
• Governmental Matters
• Overview
• Nexus
• Taxability
• Exemptions and Exclusions

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State legislative landscape
• State budgets
• Fluctuating revenue streams
• Balanced budget requirements
• States cannot balance by way of cash creation

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What is Sales Tax?
• Sales tax is generally defined as a tax paid to a governing body
on sales of goods or enumerated services
• Sales taxes are amongst the most important taxes imposed by
states
• State sales tax is the largest and fastest growing revenue
source for states

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Sales Tax vs. Use Tax
Sales Tax – Generally levied against the transfer of title and/or possession
of tangible personal property in exchange for consideration.
• Sales tax applies when the seller has nexus and is subject to the state
taxing authority
• Sales tax is always collected by the seller
Use Tax - Tax imposed on the in-state, use, storage, or consumption of
TPP and enumerated services (think unrecoverable reverse charge)
• How will states catch you?
• First Functional Use

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Sales Tax Theory – Flow of
Taxation
General Product Cycle
1. Raw materials are sold to manufacturer
2. Manufacturer sells to wholesaler
3. Wholesaler sells to retailer
4. Retailer sells to consumer
Consumer Pays Sales Tax
{

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What's the Big Deal?

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Example of Complexity
Software as a Service (SaaS)
• What is it?
– TPP, Info service, Data Processing
• How should it be taxed?
• How are state laws defined?
• Where should it be taxed?
– Download destination, user location, billing address?

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Sales and Use Tax Nexus
• Seller must register with the state and collect sales tax for
taxable transaction if the seller has a physical presence (e.g.
nexus) in the state
• Employees, independent contractors, property, “click through,” affiliates,
registration
• Nexus = some connection
• Quill Corp. v. North Dakota
– Quill met minimum connection standard of the Due Process clause
via the economic nexus; did not meet the sufficient nexus standard of
the Commerce Clause

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Sales and Use Tax Nexus
• Erosion of physical presence rule by introduction of gray-area
standards
• Economic Nexus
• Click-Through Nexus
• Bright-Line Nexus Standards
• Direct Marketing Ass'n. v. Brohl – Invitation to challenge physical
presence
• States accepting invitation:
• Alabama – pure economic nexus standard
• South Dakota – all remote sellers + "fast track" clauses

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Who collects the tax?
• Most states collect tax on behalf the state as well as local
jurisdictions
• The state will then allocate the appropriate amount
• Sourcing (Origin v. Destination)
• Where the tax is due and at what rate
• Can be different for sales of property or services
• How to source or situs
• Base on State, City, and Address
• Five digit zip codes are usually not enough
• Same code may have 5+ different taxing jurisdictions

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Tax Rates
• Any one transaction may be affected by multiple tax rates
• Jurisdictions - State, County, City, Special Purpose
• For example, Dallas, Texas (8.25%)
• 6.25% State rate
• 1.00% City of Dallas (Local)
• 1.00% Dallas Mass Transit Authority (Local)
• Home rule jurisdictions (AL, CO, LA, etc)

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Tax Base
• Tax Base – Amount of purchase that is taxable
• Adjustments before the sale, likely considered part of taxable measure
• Adjustments after the sale, probably not part of taxable measure
• Possibly excluded from tax base
• Separately stated repair or installation labor
• Trade-ins, discounts, coupons
• Exempt property or buyers

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Discounts, Coupons, and Rebates
• Purchase price discounts and retailers' coupons typically reduce
the tax base
• Reimbursable manufacturer’s coupons and rebates, though, are generally
included in the tax base
• State’s typically impose tax upon the gross selling price less
discounts not reimbursed by a third party
• Tax is not generally allowed to be included in the sales price

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Exemptions vs. Exclusions
• Exclusion - Not mentioned in the tax code
• Exemption - Tax code specifically says product/service is not
taxable. All TPP generally taxable unless specified otherwise
• Documentation generally required
• Burden of Proof: Generally on state for exclusions & taxpayer for
exemption*
Services are generally nontaxable unless specifically enumerated

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Exemptions
• Types of Goods:
• Necessity goods – Food, medicine, sometimes clothing
• No exemption documentation generally needed
• Type of Use for Goods:
• Resale/Component parts
• Manufacturing
• Other uses

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Exemptions Detail
1. Type of Use for Goods – Common Issues:
• Is product resold?
• What about airline meals, free samples, prizes, wrapping, hotel
incidentals, etc.?
• Goods use:
Packaging
Manufacturing Repair parts
Pollution control equipment
Research and development
Directly, predominately, more than 50%, etc.

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Exemptions Detail
2. Type of Purchaser:
• Government
• Charity
4. Occasional Sales:
• Garage sale
• Sale of non-inventory items by a business
5. Bulk Sale:
• All or a substantial portion of a business’s assets
• See also, successor liability

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Bundled Transactions
• Bundled Transactions contain both taxable and nontaxable Items
• TPP and service
• TPP and intangible
• Taxable and nontaxable TPP
• Taxable and nontaxable services
• Tax Base Test
• Is nontaxable item separately stated?
• If yes, then determine if item may be excluded
• If not, follow state test to determine taxability

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Reciprocity
• Generally, each state should acknowledge taxes paid on the
same product in another state
• Only applies if tax was due
• If tax was incorrectly paid, the other state may ignore
• Could lead to double taxation
Typically purchaser owes tax in only one state

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Exemption Certificates
• Types
• Exemption Certificate
• Manufacturing Certificate
• Resale Certificate
• Multistate Certificate
• Considerations
• Good faith
• Certificate Management
• Expiration
• Physical/Digital Storage
• Systems Integration
Buyer gives to seller in lieu of sales tax

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Sales and Use Tax Audits
• Triggers
• Vendor/Customer Audits
• Size/Sales volume
• Complexity of returns
• Adjustments during prior audits
• Penalties & Interest can accrue for unpaid taxes
• Statute of Limitations
• Generally 3 to 4 years for most states, if filing

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Statute of Limitations
• How long after a transaction the client may claim a refund
• How long after a transaction the state may assess tax due
• Different for each state
• May be measured in months or years
• Based on
• Date of transaction (invoice)
• Date of tax return
• Could be unlimited if no returns ever filed

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